Fitch: Viacom's 'BBB+' IDR Unaffected by $785MM Charge

CHICAGO--()--Viacom, Inc.'s (VIA) 'BBB-' Issuer Default Rating (IDR) will not be affected by the company's announced pre-tax charge of $785 million during the second fiscal quarter of 2015. This charge follows Viacom's strategic realignment announcement to improve operational efficiency in the midst of a changing media consumption market. Approximately $430 million of the $785 million charge is related to write-downs of underperforming programming (non-cash) and the remainder is related to workforce reduction charges and accelerated amortization of programming expenses. A full list of ratings follows at the end of this release.

While VIA has not publicly stated the proportion of the remaining $355 million that will be in cash, Fitch expects VIA's liquidity to be sufficient with offsetting factors such as expected savings and paused share repurchases, discussed below.

Viacom expects $350 million of annual run-rate cost savings, with $175 achieved during fiscal 2015. Fitch expects that the savings in fiscal 2015 will help offset the cash portion of the charges mentioned above. Further buffering liquidity, VIA announced that it would temporarily suspend share repurchases until October 2015 (repurchased $1.5 billion in fiscal 1H15), which supports the current rating. The ability to pause share repurchases shows VIA's financial flexibility to use share repurchases as a lever to maintain current rating and operate at current leverage ratio. There has been no change in plans regarding expected $400 million in planned acquisitions in fiscal 2015.

While the announcement in itself is relatively leverage neutral and does not affect VIA's ratings currently, Fitch has concerns around weakened TV ratings at VIA's cable networks, in light of multiple distribution deals coming up this year. Fitch does not expect VIA to lose any distribution deals; however, continued ratings softness could weaken VIA's negotiating position and pressure growth in fees. Further, Fitch will continue to monitor VIA's ability to secure advertising in the upcoming upfront market.

KEY RATING DRIVERS

--Limited capacity exists within the current ratings to accommodate Viacom's revised share repurchase plans to the extent that leverage remains at or below Fitch's 3x total leverage threshold;

--Fitch expects Viacom to manage its leverage within its stated target of 2.75x to 3x range;

--Viacom's portfolio of cable networks and leading global brands underpin the ratings;

--Viacom's track record of conservative financial policies and strategies;

--Business and financial risks are comparable with 'BBB+' rated media peers.

Overall, Fitch's ratings incorporate Viacom's strong and consistent free cash flow (FCF), high level of financial flexibility, solid credit protection metrics, sound liquidity and leading market positions within its core businesses in numerous attractive demographics. A level of ratings volatility at any given network is also factored into the ratings.

Leverage and Financial Policy

Viacom's capital structure and credit protection metrics remain stable and within Fitch's expectations for the current rating. The company's leverage target, ranging between 2.75x and 3.0x along with its revised share repurchase program highlight its capital allocation policy. Outside of potential merger and acquisition activity (which Fitch expects would focus on international market expansion), Fitch expects that Viacom will continue investing in its core businesses and growth initiatives and support shareholder returns within the context of managing to its leverage target.

Consolidated leverage pro forma for the expected repayment of the company's scheduled maturities during fiscal 2015 (totaling $850 million including $600 million of its 1.25% notes due February 2015, and $250 million of its 4.25% senior notes due September 2015) is 2.9x as of Dec. 31, 2014.

FCF and Liquidity

Led by Viacom's Media Networks segment, the company generated approximately $1.8 billion of FCF during the LTM period ended Dec. 31, 2014. Higher cash taxes and interest costs hampered FCF generation during the LTM period. Fitch expects incrementally higher cash tax payments together with on-going investments in original programming and production will pressure FCF generation during fiscal 2015.

In Fitch's view, Viacom's liquidity is strong and supported by expected FCF generation. Additional financial flexibility is provided by the company's $2.5 billion revolving credit facility (fully available as of Dec. 31, 2014) and $1.185 billion of cash on hand as of Dec. 31, 2014. Commitments under Viacom's revolver expire on Nov. 18, 2019. The credit facility contains an interest coverage covenant requiring coverage for the most recent LTM period to be at least 3.0x.

Upcoming maturities include $250 million due in September 2015, approximately $918 million due in fiscal 2016 and $900 million due in fiscal 2017. The maturities are well-laddered and manageable considering expected FCF generation, reliable market access and back-up liquidity.

RATING SENSITIVITIES

Positive: Upward ratings momentum is unlikely during the current ratings horizon. Positive rating action would likely coincide with Viacom adopting a more conservative financial policy highlighted with a gross leverage target below 2x. Meanwhile, Viacom will need to demonstrate the sustainability of its operating profile amid ongoing competitive pressures, changing media consumption patterns and evolving technology platforms.

Negative: Negative rating actions are more likely to coincide with discretional actions of Viacom's management including, but not limited to, the company adopting a more aggressive financial strategy or event-driven merger and acquisition activity, that drives leverage beyond 3.0x in the absence of a credible de-leveraging plan. Additionally, negative rating actions could result should Fitch begin to observe a negative impact from alternative content distribution platforms and other forms of entertainment that is significantly larger than Fitch's expectations or should a material weakness in network ratings drive sustained revenue and EBITDA deterioration.

Fitch currently rates Viacom as follows:

--Long-term IDR 'BBB+';

--Senior unsecured notes and debentures 'BBB+';

--Senior unsecured bank facility due 2017 'BBB+';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology, Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

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Contacts

Fitch Ratings
Primary Analyst:
David Peterson, +1-312-368-3177
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Timothy Lee, +1-512-908-9189
Associate Director
or
Alyssa Castelli, +1-212-908-0540
Media Relations, New York
alyssa.castelli@fitchratings.com
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
David Peterson, +1-312-368-3177
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Timothy Lee, +1-512-908-9189
Associate Director
or
Alyssa Castelli, +1-212-908-0540
Media Relations, New York
alyssa.castelli@fitchratings.com
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com